I’m often asked about how to instill good financial habits with children. The basic answer is setting a good example. As with any other behavior, kids will absorb what they see around them. While they are always exposed to advertising and peer pressure, the adults in their lives are also constantly giving them money messages. If the subject of money causes tension and arguments, that is what they will learn. If money is never discussed, children will not learn the connection between working for money and paying for goods and services.
It is very probable that the young children of today will never write a check and will use cash very minimally in the electronic financial world. Just like learning the basics of math before using a calculator, I believe it is important to first have a solid understanding of the basic principles of finance and money. With the changing technology we need to work differently to make certain our children learn what they need to know to be financially responsible adults. How do we demonstrate how handing over a piece of plastic to pay for something or punching in a PIN number relates to money?
With young children there needs to be a visual picture of how it all works. Have a jar that is for fun money or a planned vacation or a special purchase and let them see you putting money in that jar regularly. Then make a family decision how it will be used and let them see you take the money and pay for the chosen purchase. They will see saving and planning in action and understand there is a cost to do some things. Talk about the things you do that don’t cost money.
When giving young children money for allowance or as a gift, give it in cash with separate bills. Receiving $10 can be broken down into $1 for sharing or donation, $1 for savings and the rest for spending or however you decide to allocate the funds. Have separate piggy banks or places to put the money. Again, it is a visual example that children can understand. As they get older they can use bank accounts and cash as appropriate for the categories and monitor the balances electronically.
Even young children will have different money personalities. Some will be spenders and some savers. The spender will have a harder time with delayed gratification and saving, the saver will be reluctant to spend even when appropriate. I remember when my children were young, they were each given a $5 bill at the beginning of the summer for the ice cream truck ($5 went much farther then!). They were told it was up to them how they spent it but they could not ask for any more ice cream money during the summer. The first day, my daughter had treated the neighborhood kids and spent it all. My son had money left at the end of the summer and was fine with letting his sister treat him that first day. There are positive aspects of both but we need to be sensitive to their individual inclinations in guiding them to a balanced view of financial responsibility.
There is always the question of whether or not work or chores should be required to get an allowance. Arguments can be made both ways, but whatever you choose, the expectations must be defined. It should be very clear what they are expected to pay for with that allowance so they again learn that there is an exchange of money for goods or services and that we need to set limits based on our money resources when making financial decisions.
Talk about the household budget as kids get older. They should be aware of the costs of utilities, food, clothing, insurance and other expenses. Don’t be afraid to say “we can’t afford it” or “that isn’t where we choose to spend our money right now”. It should be a learning experience and not something that causes worry or stress. Even though we may not have an idea of how the future world of money will look, managing finances is a skill that we need to teach our children well to prepare them for life.